IRS: Taxpayers Are Stiffing Us

(AP)  The Internal Revenue Service reported Tuesday that the gap between taxes paid and taxes owed stood at more than $300 billion, with a large portion due to individuals understating income.

"Even after IRS enforcement efforts and late payments, the government is being shortchanged by over a quarter trillion dollars by those who pay less than their fair share," said IRS Commissioner Mark Everson. "People who aren't paying their taxes shift the burden to the rest of us."

The IRS said the so-called tax gap stood between $312 billion and $353 billion in 2001, the latest figure available. The figure combines new evidence about individual taxpayers, gleaned from research audits of 46,000 individuals, with older estimates of unpaid corporate, payroll and unemployment taxes.

The three-year study of individuals found those taxpayers somewhat less likely to comply with tax laws compared with the last study, which examined taxes due in 1988.

The IRS recovered $55 billion of the unpaid taxes through audits and late payments, leaving a net gap of $257 billion and $298 billion — about the same amount as the government expects to spend on Medicare this year.

The largest source of unpaid taxes came from individuals, not businesses. Among the individuals who contributed to the tax gap, most understated their income, particularly business income. Most wages and investment income were reported accurately.

Much smaller portions of the tax gap can be attributed to people who don't file tax returns and people who file a return but don't pay all the taxes they owe.

The $83 billion to $99 billion in underreported business income ranked as the top source of tax money missing from individual returns. That includes partnership, estate, rent, royalty and farm income. Excessive deductions, exemptions, credits and other adjustments accounted for $25 billion to $30 billion of the tax gap.

The nation's tax collectors have been increasing audit rates, particularly among high-income individuals and corporations, but the frequency still lags behind the mid-1990s.

Everson said the tax agency will probably never collect every dollar owed.

"No one should think we can totally eliminate the gap," he said. "That would take draconian measures and make the government too intrusive."

The IRS said the data remains preliminary and will be refined by the end of the year.